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Emissions reduction compatible with economic growth

By Wang Shuying, Shi Heling, Yew-Kwang Ng | 2015-12-14 | Hits:
(Chinese Social Sciences Today)

Headquartered in Seoul, South Korea, the Global Green Growth Institute is dedicated to “pioneering and diffusing a new model of economic growth in developing and emering countries, known as ‘green growth,’ that simultaneously targets key aspects of economic performance, such as poverty reduction, job creation and social inclusion, and those of environmental sustainability, such as mitigation of climate change and biodiversity loss and security of access to clean energy and water.” 


Currently, the economics of climate change serves as the primary theoretical framework for carbon emissions reduction. However, this paradigm has proven to be conspicuously inadequate, considering the volatile nature of the global climate and the limitations of traditional analytical tools.

In the past few years, a new perspective has emerged that argues CO2 reduction can actually revitalize rather than stifle economic development. Economic growth stemming from CO2 reduction is defined as “green growth.” In 2012, the World Bank and China’s Development Research Center of the State Council (DRC) co-issued a report titled China 2030: Building a Modern, Harmonious and Creative Society. According to the quantitative analysis section in the report, high economic growth does not have to be predicated upon high carbon emissions.

For example, from 2006 to 2010, China’s average GDP growth rate was 11.2 percent, while its energy consumption only grew 6.6 percent per year in average. The dissociation between economic development and carbon emissions is a global trend.

Three models of green growth
World Bank economist Stéphane Hallegatte said that green growth is about making growth processes resource-efficient, cleaner and more resilient without necessarily slowing them down. Currently, there are three directions in the field of green growth research: the macro-development model, the goal-oriented technological improvement model, and the inframarginal analytical framework.


Championed by Nicolas Stern, president of the British Academy, the first branch is based on Robert Solow’s neo-classical growth model. It theorizes that the environment is not only a factor of production but also a production function parameter that augments material, human and technological capital. In this light, environmental policies can boost economic growth through improving environmental quality. However, more studies are needed to crystallize the transmission mechanism of the macro-development model.

The goal-oriented technological improvement model pays closer attention to the micro-environment. Taking into account environmental and resource constraints, this model provides a roadmap to endogenous growth. The research by scholars such as MIT economist Daron Acemoğlu seems to indicate that individual investments can be channeled into the field of green technology if governments are willing to intervene. Although government intervention can be costly in the short run, the rate of green growth will eventually exceed carbon-intensive growth. It means that the overall economic growth rate will not be affected by targeted government spending.

One major breakthrough in the field is the inframarginal analytical framework devised by Monash economist Shi Heling and DRC economist Zhang Yongsheng. To elaborate on the mechanism of green growth, they constructed an equilibrium model that draws upon Adam Smith’s insight on the division of labor and the method of inframarginal analysis. They demonstrated that the market will voluntarily embrace low-carbon technology and more exquisite specialization of labor if governments combine taxation and subsidies  in their carbon-reduction policy. Compared to the other two models, Shi and Zhang’s framework can better explain market transformation caused by policy implementation. Nonetheless, it still needs clarification in several respects.

Inframarginal analytical model
To implement the double-barreled carbon-reduction policy, governments have to make two critical decisions. First, they must decide which clean energy sector will be the primary beneficiary of carbon tax subsides. Then they must determine how to allocate the tax subsidies. There are four dilemmas to consider when making this decision.


First, the allocation of tax subsidies requires tremendous information cost, given that governments have to put in a vast amount of human and financial resources, in order to collect, organize and analyze information related to the clean energy sector. Second, low-tech enterprises are incentivized to withhold unfavorable facts, since cover-ups can lead to more subsidies. Due to information asymmetry, governments are prone to uninformed decisions. The uncertain outlook for technological development is the third root cause of unwise moves. Last, when decision-making power lies in the hands of few government officials, corruption seems to be inevitable.

Moreover, Shi and Zhang did not yet specify the influence of carbon-reduction policies on social well-being which is both the departure point and the ultimate goal of all relevant measures.

Shi and Zhang modified their model in 2012. They proposed that governments can utilize the carbon tax revenue to augment the transactional efficiency of the clean energy sector. There are five possible measures—lower the threshold for entry into the clean energy market, encourage companies to develop new technology through strengthening patent protection, accelerate knowledge accumulation through allocating more funds to basic research, and attract venture capital through boosting secondary market liquidity and introducing an exit mechanism.

Double-barreled reduction policy
Yew-Kwang Ng and Siang Ng, economists at the Nanyang Technological University used the inframarginal model to explain the reason why governments encourage improvements in infrastructure.
They discovered that when governments invest in infrastructure to boost transactional efficiency, such investments not only generate direct revenues but also accelerate specialization of labor, which will boost network benefits. The indirect benefit had been largely overlooked by outdated marginal analyses, which narrowly focused on optimal allocation of resources within the confinement of the work breakdown structure. In contrast, specialization of labor is an endogenous variable in the inframarginal framework. That is why the latter can better explain the fluctuation of organization efficiency.

Yew-Kwang Ng and Siang Ng’s theory on indirect network externality can be applied to carbon-reduction issues. On the basis of this theory and through the means of numerical simulation, it can be shown that governments can play a positive role in facilitating the structural transformation of high-carbon industry without being entangled in costly and inherently defective decision-making procedures, if they utilize tax revenues collected from high-carbon businesses to enhance the transactional efficiency of the clean energy sector. More importantly, compared with simply levying heavy taxes on high-carbon businesses, such a measure can better serve the common good, given that it not only takes into account the external cost of carbon emissions but also emphasizes indirect network externality. The results of numerical simulation lend support to the idea that, under certain circumstances, the implementation of a carbon-reduction policy can benefit from enhanced production elasticity of the input of low-carbon business, energy efficiency and market transactional efficiency.

In summary, the current climate crisis can materialize into concrete development opportunities, if governments worldwide are willing to adopt appropriate policies that cater to the realities of their own countries. There is evidence that carbon emissions reduction is a catalyst for green economic transformation and sustainable growth.

Wang Shuying is a doctoral candidate at the Jinhe Center for Economic Research at Xi’an Jiaotong University. Shi Heling is a professor of economics at Monash University. Yew-Kwang Ng is a Winsemius professor in economics at Nanyang Technological University.